PTO Cash Out Policy: Common PTO Policies & Employee Rights
Updated: Nov 21
You’ve been working hard all year without a break. You’d like to take time off but December is your busiest month.
What will happen to your vacation time? Can an employer take away earned PTO?
It depends.
In this blog we’ll discuss earned PTO, various company policies, and the laws that protect employee rights to PTO.
Table of Contents
How Do Vacation Accruals Work?
Whether you’re starting a new job or have been with your company for a while, you might not understand or even know about the vacation policies in effect. Let’s face it, sometimes they’re just confusing. Adding up the hours worked to figure out how many days you get off? What a pain!
However, it’s important to know if you’ve earned any PTO (paid time off) and when you can use it.
When you don't take all of your PTO, your unused days can accumulate and add up over time.
Can Your Employer Restrict the Accrual of Vacation Time?
Understanding how vacation time accrual works is essential, but it's equally important to be aware of whether your employer can place restrictions on the accrual process. Companies may implement policies that govern when employees can begin accruing paid time off and whether there are limitations on the accrual rate.
You may work for a company that requires you to pass a probationary period, such as the first 90 days, before you can begin accruing time off. Some companies may allow you to begin accruing vacation time immediately but might put a restriction on when you can use that time.
You may earn time based on hours worked or perhaps your company allows you to accrue one paid day off for each month worked. Below, we will detail the most common accrual policies and show you exactly how they work.
But, what about caps?
PTO Caps
In some cases, it’s legal for companies to place a cap on how much PTO employees can accrue. They might do this to encourage their employees to use vacation time regularly, or it can be done to ensure PTO is not carried over. Each policy is different.
Use-it-or-lose-it policies do not allow employees to carry over or cash out unused vacation days — meaning employees forfeit any unused vacation time.
In some states, “Use-it-or-lose-it” policies are illegal. But, in some of those states, if vacation time isn’t used then it must be cashed out when the employee leaves the company.
Because of these laws, companies in those states often implement some sort of cap to determine how much vacation time can be accrued. Some states specify an acceptable ratio, while others allow for any cap that is deemed “reasonable”.
We’ve provided a handy list below to help you understand what’s legal in your state, but you can always contact your state labor department for clarification on any vacation policy.
Can Your Employer Tell You When You Can Take Your Vacation Time?
Taking a break is essential, but your employer may have a say in when it happens. Companies often manage vacation schedules based on business needs and operational demands. While employees can request time off, approvals depend on factors like workload, project deadlines, and overall staffing.
Employers may establish blackout periods during busy seasons or limit vacations in critical roles. Understanding your company's policies, including advance notice requirements and blackout periods, is crucial. Communication with your supervisor and HR can help navigate scheduling challenges and increase the chances of getting the time off you desire.
What Happens if You Don’t Use Your PTO?
This is dependent on the specific policies implemented by your employer and the laws in your state.
For example, with a use-it-or-lose-it policy, you are technically forfeiting your PTO if you don’t use it by the end of the term.
But with a “carryover with a cap” policy, you may be able to carry over some PTO, but it will be capped, meaning you technically lose some of it.
Knowing your company’s policies and your state labor laws can help to avoid the unwanted disappointment of losing valuable PTO.
Can an Employer Take Away Earned PTO?
So, what’s the deal? Can an employer take away accrued vacation time? Technically, an employer can only take away earned PTO if they have a legal policy that allows it.
At Sorbet, we want to promote healthier employer/employee relationships by offering a PTO solution that benefits everyone and normalizes taking time off from work.
Unused PTO is a loss for everyone. Having the option to cash out PTO results in greater job satisfaction and a better work-life balance for employees while reducing PTO liability for employers.
Refer Sorbet to your HR department and start cashing out your unused PTO today!
Understanding the 3 Most Common Company PTO Policies
#1: Use-it-Or-Lose-it PTO Policy
Use-it-or-lose-it is probably one of the most restrictive PTO policies for employees. The policy states that employees are obligated to use their vacation time by a predetermined date or risk losing it. No cash outs or rollovers are allowed with use-it-or-lose-it policies.
For employers, the payout liability is reduced, but employee relations may suffer. Even if the policy is clearly conveyed and employees are aware of when they need to use their PTO, it’s not always possible for every employee. This can cause frustration among the workforce.
Can an Employer Take Away Your PTO With the Use-It-Or-Lose-It Policy?
While some states expressly prohibit use-it-or-lose-it policies, employers can take away earned PTO where this policy is allowed.
If you don’t use your PTO by a certain time, it simply ceases to exist with no cash payout and no possibility of using it at a later date.
So, if your company has a use-it-or-lose-it policy, you should know exactly when you need to use your PTO before it expires.
#2: Paid Time Off Carry Over With a Cap Policy
Carry over caps limit how much PTO can carry over from one year to the next. Also referred to as an accrual cap, carry over with a cap policies allow employers to halt PTO when an employee’s total time off has reached the predetermined cap, as per the policy.
This is a popular way for employers to manage PTO in states where the use-it-or-lose-it policies are illegal.
The way this policy works is to encourage employees to use at least some of their vacation time or risk losing it when they reach their cap.
Can an Employer Take Away Your PTO With the Carry Over with a Cap Policy?
With a carry-over with a cap policy, employees can technically lose some of their PTO.
For example, Heather’s employer allows her to accrue 10 paid vacation days per year, with a rollover cap of 15. That means that if Heather does not use 5 of those 10 days within that year, she risks losing them because her maximum allowance is 15 days (5 days carried over plus 10 days earned within the next year).
This might work well for employees who want to work more one year so they can take more time off the following year.
If your company follows this policy, don't risk losing your hard-earned PTO! Tell your HR department about Sorbet's unique PTO cash out solution. Unlock extra cash while saving your company money.
#3: Unlimited PTO Policy
Unlimited PTO policies sound like a dream come true for some employees. Popular among tech companies, unlimited PTO is used as a recruiting tool, but it’s questionable whether the policy actually benefits employees.
The truth is, without company guidelines, employees actually take less time off with an unlimited policy than they do with a traditional PTO policy.
Take Sanjeev, for example. Sanjeev just started working as a programmer at a tech startup. He was offered a high salary with bonuses and unlimited PTO. Great, right?
Not really. What Sanjeev quickly realized is that most of his coworkers were experiencing burnout because they took very little time off. Sanjeev didn’t feel comfortable being the only programmer to utilize the unlimited PTO, so he also started to feel burnt out.
Traditional PTO policies give employees limits they can work within, without the guilt of wondering if they’re taking advantage of an unlimited PTO policy.
Can an Employer Take Away Your PTO With the Unlimited PTO Policy?
Unlimited PTO policies come with a catch. They don’t accrue. So what does this mean?
If your employer offers unlimited PTO and then you quit or leave the company, the employer is not obligated to pay you for your unused time.
This means that you effectively lose money when compared to PTO policies that payout for unused vacation or sick days.
Does Your State Require Employers to Payout PTO by Law?
Can a company take away vacation time by law in the U.S.? It depends on the state where you are employed.
While most companies offer formal PTO policies for vacation time, sick days, etc. many states do not force employers to pay out unused accrual or allow employees to roll it over.
Below, we outline which states have laws against use-it-or-lose-it policies and which states require unused PTO to be paid out upon termination of employment.
States That Do NOT Allow Use-it-Or-Lose-it PTO Policies
These states prohibit employers from implementing a use-it-or-lose-it policy:
California
Colorado
Montana
Nebraska
These are the states that DO allow employers to implement use-it-or-lose-it policies:
Alabama
Alaska
Arizona
Arkansas
Illinois
Indiana
Kansas
Louisiana
Maine
Massachusetts
New Hampshire
North Carolina
North Dakota
Texas
Utah
Virginia
Wyoming
All other states have not addressed use-it-or-lose-it policies within their labor laws.
States That Require PTO Payout Upon Termination
Many employees leave their employment with unused PTO. Some states require that all unused PTO should be paid out by the employer upon termination of the employment contract.
These states are as follows:
California
Colorado
Illinois
Indiana
Louisiana
Massachusetts
Nebraska
North Dakota
Rhode Island
If you are uncertain about your company’s PTO policies, always check with your state’s labor laws.
Are You Entitled to Your Vacation Pay If You Get Laid Off?
The answer to this question can vary depending on company policies and state regulations.
In some states, labor laws require employers to compensate employees for unused vacation days upon termination, including layoffs. However, this isn't a universal rule, and not all states mandate such payouts. It's crucial to be aware of your state's labor laws and your company's specific policies regarding vacation pay during layoffs.
If you find yourself facing a layoff, it's advisable to consult your employee handbook or HR department for clarity on your entitlement to vacation pay. Understanding your rights and company policies can help you navigate the financial implications of a layoff more effectively.
In cases where state laws or company policies do not mandate vacation pay upon layoff, negotiating with your employer during the exit process may be an option. Open communication and awareness of your rights will empower you to make informed decisions during this challenging period.
For even more info on the topic, explore our comprehensive guide about PTO.
Sorbet: Providing Employers and Employees With a Win-Win PTO Solution
At Sorbet, we believe in normalizing taking time off. We want to encourage employees to feel confident about spending valuable time away from work, without feeling guilty about it.
By introducing a PTO cash out option to your PTO policy, employers can reduce PTO liability while improving employee wellness. Giving employees the freedom to cash out unused PTO, as opposed to losing it completely, is a sure way to increase employees' overall job satisfaction and productivity.
Sorbet solves ongoing PTO issues by transforming outdated, antiquated systems into a winning solution by:
Lowering accrued liabilities and saving companies money
Allowing employees to instantly exchange unused PTO for cash instead of letting it go to waste
Refer Sorbet's sweet PTO cash out solution to your HR department and unlock extra cash when you need it the most, without touching your monthly salary.
Plus, discover how inflation affects PTO, ensuring your financial strategy stays ahead of the curve.